AVC help please

david262275

I’m selecting an AVC with my employer through Prudential and have 2 options to consider. (I’m 16 years away from retirement)

Either the default option which is Prudential with profits fund or the lifestyling option of Prudential Dynamic Growth. Any help would be appreciated as I’m baffled!

david262275

Should say the lifestyling option is Prudential Dynamic Growth Lifestyle targeting 100% cash.

Marcon

Are you able to be a bit more specific about what's baffling you? I understand the temptation to respond with 'all of it!' but if you can be more explicit than that, you're more likely to be spared a load of text in response that you really don't need to read.

Are you by chance in the LGPS?

david262275

https://forums.moneysavingexpert.com/discussion/comment/82020250#Comment_82020250

Hello, yes it’s LGPS!

Just not too sure the difference between with profits fund or dynamic growth fund ie which one is likely to pay out more and which has less risk?

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82020256#Comment_82020256

ust not too sure the difference between with profits fund or dynamic growth fund ie which one is likely to pay out more and which has less risk?

By the nature of investing, the ones with less risk tend to pay out less, and vice versa.

But to try and answer your question.

A with profits fund is a rather old fashioned way of investing ( a bit like the Pru ) . In simple terms the idea is that it increases by a small % each year, whether markets go up or down. In good years it hoards profits and pays them out in bad years- so a kind of smoothing effect.

The Lifestyle fund, will be more targeted at growth with a high % of equities ( shares) when you are younger, and as you get older it slowly reduces the % of equities. It seems to derisk right down to 100% cash, which is only desirable if you intend to buy an annuity with it.

Are these really the only two choices?? Is there not a lifestyling option that does not go down to 100% cash at retirement?

DRS1

But if this is the LGPS isn't there a chance that all the AVC fund will be used to pay a tax free lump sum at retirement? If so then 100% cash might make a lot of sense.

daveyjp

"Bafflement" can be reduced once the decision on what the AVC funds are needed for is made, I assume in 16 years you will be 67.

If you know you will need a lump sum of cash on retirement the lifestyling may be suitable as you are reducing risk over time by moving to cash so if markets crash just before retirement you aren't affected too badly,

If you intend on continuing to invest or move to a draw down model over many years of retirement continued growth may be a better option, lifestyling may therefore be a poor option.

AVCs can also be used to buy extra annual LGPS so can offer an opportunity for early retirement using the AVCs to buy extra years.

david262275

Hi that’s really helpful thanks. There is only one lifestyling option.

I take it the lifestyling option will be preferable over the with profit fund?

I don’t intend buying an annuity I would take the cash at the end of the 16 years/retirement. Would the lifestyling option still be preferable?

AlanP_2

https://forums.moneysavingexpert.com/discussion/comment/82020343#Comment_82020343

Yes and No, like many things in investing.

If the intention is to spend the AVC lump sum at retrirement or shortly after then yes, a "lifestyle cash" option makes sense. This is particularly applicable if the cash is needed to pay off the mortgage or similar at a fixed point in time.

But on the other hand, if the AVC lump sum is going to be paid out and then re-invested in a S&S ISA for example then no, it doesn't really make sense to go for a "lifetsyle cash" option. It would be better to choose the "long term" investments you want to cover the periods before and after taking the LGPS pension. The exact funds may be different with the AVC provider and the post retirement platform but you can at least go for the same "style" e.g. 100% global equity, a 60/40 multi-asset option etc.

david262275

I’ll be 62 at retirement in 16 years time. I do intend to take the lump sum cash and not reinvest. I’m thinking the lifestyle option is best from what I’m reading above?

Would I be right in summing up that the lifestyle option is riskier but should return more than the with profit option over the 16 year period?

Thanks everyone for your help with this I really am out my depth here!!

DRS1

I am not sure anyone can tell you with any certainty what will (or even should) happen over the next 16 years or which will be "better".

Years ago I told my mother to invest her AVCs in some unit linked equity fund. After she retired she did once mention to me that she got back less than she had paid in. I think it was very good of her to only mention that ONCE. Possibly she would have been better off with a lifestyle fund which would have switched her out of equities into cash (or bonds) as she got closer to retirement. Such things did not exist then.

When I set up my first pensions in the mid 80s I was very cautious and went with a number of with profits policies. One was with Equitable Life (which alone should tell you not to do as I did!). Another was with Scottish Widows and for that one I split contributions between with profits and a unit linked equity fund. It is fair to say that the with profits bit made very boring very low returns over the years while the unit linked equity fund has been up and down like a yo-yo. The equity fund outperformed the with profits fund by 2:1 over 40 years (although to be fair I did stop paying into the with profits fund a lot sooner than the equity fund).

But as they say in the investment ads past performance is no guide to future performance.

On that subject the two funds you are looking at should have fund factsheets available which may show past performance for each. They may also show what each fund is invested in and for the lifestyle one explain how the move from equities to cash is structured - eg does it start when you reach 57 and then progress at 10% each year? One thing to look at it is whether you can specify you want to be 100% in cash at age 62 rather than age 67 - not saying that would be a good idea but worth investigating if you want to go at 62.

One thing about switching to cash is that the return on cash is not great (which is the excuse the Govt. is using for messing with cash ISAs) so you may find that the with profits fund might outperform the lifestyle fund for the years when most of the lifestyle fund is in cash - but again who knows - interest rates were meant to go down this year but are going up instead.

Both with profits and lifestyle funds have things in their favour (smoothing returns, setting money aside to cope with bad years and the prospect of a chunky final bonus for with profits funds and high equity exposure when you are younger but de-risking as you get closer to retirement for the lifestyle fund) but neither will satisfy the people who say stick it all in a low cost global tracker and forget about it for 16 years.

I am sure that has all been of no use whatsoever.